Tag Archives: Slowdown

China has a serious problem, bigger than the slowdown in manufacturing growth or the housing-price bubble. It’s water, and it’s a catastrophe that could affect the rest of Asia and the larger world.

In testimony to the U.S. Senate last week, the Council on Foreign Relations’ Asia director Elizabeth Economy said China is facing a water crisis with “profound implications” if the government doesn’t get a grip on it over the next few years.

According to China’s own water-resources officials, more than 400 Chinese cities lacked enough water last year, with 110 of those facing “serious scarcity.”

The key culprit is industry, which Economy said uses 4 to 10 times more water per unit of GDP than similar economies and is polluting the nation’s existing water resources at an alarming rate. She cited a February 2013 report by the Geological Survey of China saying a full 90% of the country’s groundwater was polluted, while the Ministry of Environmental Protection said the water from about 25% of China’s major river systems was so filthy that it couldn’t be even used for industry or agriculture.

Recently, it seems no developing country is safe from sudden, unexpected protests. In Brazil and Turkey, empowered middle classes pushed back against perceived governmental injustice; protests erupted, and leaders’ approval ratings dropped precipitously. In Egypt, the economic picture was as ugly as the political one, and the military’s ouster of President Mursi has fomented conflict and instability.

China may look like a candidate for the type of protests currently sweeping the developing world. Not only is a newly empowered middle class demanding better services and more accountability from government — growth has also tapered off in recent quarters. Don’t hold your breath. At least for the time being, China is well-positioned to navigate such challenges far better than its emerging market competitors.

The question on the minds of most people is how much of a slowdown Chinese leaders can tolerate. Many people, including senior government officials in the West, seem to believe that Beijing will not allow its GDP growth per annum to fall below 8 percent (sometimes one also hears 7 percent as the magic number) because growth below that line is supposed to trigger social unrest. Typically, those who place a lot of faith in this number argue that unemployment will explode once growth stalls. For a government obsessed with domestic stability, that would be a nightmare.

While seemingly persuasive and plausible, the widespread notion that there is one magic growth number that will trigger panic in Beijing is simply a myth.

One reason to dismiss the purported connection between growth and unemployment-based social unrest is the divergence between growth and employment in the Chinese economy in recent years. Because of its investment-driven growth model, China’s economic expansion has been capital-intensive but labor-light. Modern power plants, steel mills, toll roads, and ports are expensive to build, but require a small number of workers to operate. As a result, each additional yuan invested in the Chinese economy is generating fewer jobs. This disconnect between investment-driven growth and job generation can be seen in these numbers. Between 2004 and 2009, Chinese investment in equipment and plants quadrupled, but the number of manufacturing jobs increased only by 15 percent.

If Chinese leaders are worried about the GDP slipping below 8% then that is what matters. What will they do? Will they employ a more aggressive foreign policy to compensate? I think they have already answered that question with a yes. Also, the decline in the economy is just one more problem added to a list of many problems for Chinese leaders to cope with.

The potential consequences of China’s economic slowdown

The initial thoughts of declinism among Chinese leaders provide an alternative explanation for China’s assertiveness. While optimists can simply wait for a better future, pessimists need to exploit the image of the rising China to their advantage. The prospect of decline creates an incentive for Chinese leaders to grab what they can while they can. Overconfidence certainly is dangerous in international relations, but a pessimistic Chinese leadership can be more threatening than an optimistic one.

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It is not advantageous to admit that your nation’s power will decline, and so signs of declinism among Chinese leaders may be hard to detect. But the Chinese Communist Party has many reasons to worry about the future. China has been benefiting from its demographic structure, with a large working-age population and relatively small number of young and elderly dependents. China’s labor force, however, has already begun to shrink, a process that will accelerate from around 2020, leaving a large number of retirees.

The Chinese economy must also overcome the middle income trap, inefficiency of state-owned enterprises, corruption and environmental problems.

With all challenges the Chinese leaders will face, declinism in Beijing may palpably impact upon domestic and foreign policy sooner than present optimism dares to hint.

Scientists are struggling to explain a slowdown in climate change that has exposed gaps in their understanding and defies a rise in global greenhouse gas emissions.

Often focused on century-long trends, most climate models failed to predict that the temperature rise would slow, starting around 2000. Scientists are now intent on figuring out the causes and determining whether the respite will be brief or a more lasting phenomenon.

So there are modeling problems. As I said a couple of years ago, when you calibrate a model based on data within a certain range, and then go outside of that range, then your model might not work correctly. When I heard scientists confidently explain how good their climate models were, I knew we were in for trouble. Because a real scientist would understand that moving into new territory is always dangerous.

Cracks are showing in Russia’s leadership as a slowdown in the economy is beginning to cause rifts at the heart of the government, with one academic telling CNBC on Thursday that the economy poses the biggest threat to the country’s leadership.

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Putin Out?

Richard Edgar Pipes, professor of Russian History at Harvard University, told CNBC that there was a danger that prolonged weakness in the economy could harm Putin, whose popularity among the Russian electorate has been waning for some time.

For years, the conventional wisdom about China’s GDP was this: if the country didn’t meet its target of 8 percent annualized growth, political instability would result. The reasoning behind this wisdom is pretty simple: the Chinese Communist Party, having long ago forfeited its ideological legitimacy, depends solely on providing economic growth in order to stay in power. So long as enough people prosper, they’ll put up with a fair amount of repression and corruption. But as soon as economic growth slows, China could be in for a rude awakening.

Is a revolution in China going to happen today? Of course not. What this means is that the probability of a revolution starts to increase. Chinese leaders will be sweating a little more. There will be more protests. But this could go on for a number of years. Or it could spiral out of control soon if an incident sets off the people. Nobody really knows, and most of all the Chinese leaders don’t really know either. That’s where the sweating comes in.

If you are a Chinese leader, then you need a plan B: Getting much of your money and family out of the country if it is feasible. Obviously, this won’t work for leaders who are too high up.

Heightened political tensions have overtaken the eurozone debt crisis and US fiscal shock as the biggest threats to the developing economies in Asia,according the Asian Development Bank (ADB).

While “austerity fatigue” in the euro area and “unresolved fiscal drag” in the US remain significant risks to developing Asian economies, escalating border disputes in the region pose the largest menace to growth, said the Bank’s annual outlook report.

The Bank warned that “potential nationalistic passions”, such as those which led to a Chinese boycott on Japanese goods over the disputed sovereignty of eight small islands in the East China Sea last year, could drag on growth in the region.

“Political risk has emerged as the main threat to the global and regional outlook,” said the report.

The PRC’s high-profile, unyielding position on the Senkakus seems to reflect something other than reflexive nationalism, political weakness, or the blunderings of a disoriented and incapable elite. It appears that the Beijing leadership may have decided to edge beyond using the Senkaku dispute as a mere demonstration of its economic countermeasures to the US pivot into Asia, to thinking seriously about actually trying to kick a key prop out from under the US initiative – a vital, but weakened and vulnerable ally: Japan.

I previously argued that the PRC had decided that the best riposte to the
US/Japanese strategy of using maritime disputes to polarize East Asia diplomatically and militarily to China’s detriment was to eschew overt
government-ordered military or economic action – such as the counterproductive slowdown in rare earth exports to Japan during the 2010 Captain Zhan stand-off – in favor of “popular” but state-sanctioned economic retaliation against Japanese economic interests inside China.

There is every indication that this strategy is ongoing – and working.

In the decade to come, the United States, Europe, and Japan are likely to grow slowly. Their sluggishness, however, will look less worrisome compared with the even bigger story in the global economy, which will be the three to four percent slowdown in China, which is already under way, with a possibly deeper slowdown in store as the economy continues to mature. China’s population is simply too big and aging too quickly for its economy to continue growing as rapidly as it has. With over 50 percent of its people now living in cities, China is nearing what economists call “the Lewis turning point”: the point at which a country’s surplus labor from rural areas has been largely exhausted. This is the result of both heavy migration to cities over the past two decades and the shrinking work force that the one-child policy has produced. In due time, the sense of many Americans today that Asian juggernauts are swiftly overtaking the U.S. economy will be remembered as one of the country’s periodic bouts of paranoia, akin to the hype that accompanied Japan’s ascent in the 1980s.

China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.

Are we obsessing about its rise when we should be worried about its fall?

For the last 40 years, Americans have lagged in recognizing the declining fortunes of their foreign rivals. In the 1970s they thought the Soviet Union was 10 feet tall — ascendant even though corruption and inefficiency were destroying the vital organs of a decaying communist regime. In the late 1980s, they feared that Japan was going to economically overtake the United States, yet the crony capitalism, speculative madness, and political corruption evident throughout the 1980s led to the collapse of the Japanese economy in 1991.

Could the same malady have struck Americans when it comes to China? The latest news from Beijing is indicative of Chinese weakness: a persistent slowdown of economic growth, a glut of unsold goods, rising bad bank loans, a bursting real estate bubble, and a vicious power struggle at the top, coupled with unending political scandals. Many factors that have powered China’s rise, such as the demographic dividend, disregard for the environment, supercheap labor, and virtually unlimited access to external markets, are either receding or disappearing.

The seeds of destruction are sown during the good times. Any society heavily focused on growth and stability will surely crash. Bad thinking, bad decisions and corruption will all grow exceedingly great during the good times in these societies. Then a crash will come.

You want a messy society with lots of small economic recessions to burn out the problems on a regular basis. Think of these small recessions as democratic elections. You want lots of elections to keep things on track. Suppressing elections will lead to revolutions – the big collapse. Suppressing recessions leads to – the big collapse.